Directors' Duties and Responsibilities

We all know that doctors are the worst people when it comes to looking after their own health, and of course the same is true of company directors, often too busy running a company to recognise the pitfalls of being a director or whether they are placing themselves personally at risk. In this regard non-executive directors are particularly at risk, seemingly in there to help out only when required or to make up the numbers, but often dangerously unaware of what is really going on. This bulletin sets out to make company directors more aware of some of the consequences of turning a blind eye to their duties and responsibilities.

Duties and Responsibilities

The law broadly requires that a director should exercise his duties and powers as a fiduciary for the company in good faith and without negligence.

The effect of more recent insolvency legislation - the 1986 Insolvency Act and the Company Directors Disqualification Act of the same year - has been to heighten the profile of directors' accountability, supplementing their statutory duties under the Companies Act 1985. This has been noticeable in an increase in cases brought against directors who fall foul in respect of substantial property transactions affecting their companies or who fail to disclose their interests in contracts under discussion at board meetings. Whilst there is an honest and reasonable statutory defence to breaches committed by directors, this is of little help in cases of corporate insolvency, to which we refer below.

Combined with the increasing rigour of the Courts in applying corporate and insolvency legislation there is the relatively new concept of corporate governance (derived from the Cadbury, Greenbury and Turnbull Reports) as exercised through the Combined Code introduced by the London Stock Exchange in 1998. Although the Combined Code applies only to listed companies, a version of it may in time come to be applied to non-listed companies as well. Under the Combined Code a board is required to maintain an internal control system and to undertake periodic reviews on the effectiveness of that system. However, looking outside the sphere of listed companies, such a control and review system has particular relevance to newly appointed board directors (and for that matter all directors), who would be well advised to review the actions of all of their fellow directors, including the CEO, and ensure as a minimum requirement that:-